Use this article to understand the difference between eligible rollover distributions (ERDs) and non-eligible rollover distributions (NERDs), and how withholding requirements apply to each.
Most distributions you take from your 401(k) account can be rolled over to another eligible retirement plan (like a profit-sharing, 401(k), or 403(b) account) or an Individual Retirement Account (IRA). These are called eligible rollover distributions (ERDs).
However, some distributions are one-way—they cannot be rolled over to another eligible retirement plan or IRA. These are called non-eligible rollover distributions (NERDs). Any distribution that is not a NERD is an ERD.
A distribution is a NERD if it is:
A required minimum distribution (RMD)
A loan that was deemed distributed
An eligible automatic contribution arrangement (EACA) refund
Due to a non-discrimination testing failure (like Actual Deferral Percentage (ADP) or Actual Contribution Percentage (ACP) testing and more)
Due to exceeding a plan limit (deferrals beyond the annual limit and more)
A withdrawal made as part of a series of substantially equal periodic payments (not allowed under Gusto 401(k) plans)
Used to pay for accident, health, or life insurance (not allowed under Gusto 401(k) plans)
Dividends on employer securities (not allowed under Gusto 401(k) plans)
There are two main reasons to know whether your distribution is an ERD or a NERD:
To determine whether the distribution can be rolled over to another retirement account
To understand what type of tax withholding applies if it is not rolled over
When you take a cash distribution from a Gusto 401(k) plan, the type of withholding the Internal Revenue Service (IRS) requires depends on whether the amount could have been rolled over.
Tax withholding applies to the taxable amount of your distribution. In general, any amount from a pre-tax source is included in this calculation. Actual contributions you made to a Roth source are not included, but the earnings are—unless the distribution is a qualified Roth distribution.
If your distribution is a NERD, the IRS requires 10% federal income tax withholding on the taxable portion—unless you elect otherwise. You have the option to:
Waive federal withholding altogether
Elect anywhere from 1% to 100% withholding
Note: State income tax withholding may also apply. If so, you will not be able to request 100% federal withholding.
Even if you choose to waive federal (and state, if applicable) withholding, any pre-tax amounts in the distribution generally count as taxable income for the year you took the distribution. The 10% early distribution penalty also applies unless you qualify for a penalty exemption.
Important: Withholding too little may result in underpayment penalties. The instructions for IRS Form W-4R can help you choose an appropriate withholding rate. Gusto Retirement does not use Form W-4R—we discard this form if it’s included with a distribution request.
If your distribution is an ERD and you have it paid to yourself instead of directly rolled over to another retirement plan or IRA, the IRS requires at least 20% federal income tax withholding on the taxable portion. You cannot waive this withholding, but you can elect to have more than 20% apply. Certain states also require state income tax withholding.
In most cases, you have 60 days to indirectly roll over ERDs you take as cash distributions. Any pre-tax amount you do not roll over counts as taxable income for the year. The 10% early distribution penalty applies unless you qualify for a penalty exemption.
Note: If you do not live in the United States at the time of your distribution, special tax withholding rules apply. Learn more about taking a distribution as a foreign person.
This information is for general education purposes only and not intended to be tax advice. We encourage you to consult a qualified tax professional before requesting a distribution.